RBI to focus on rupee, pause on rates

July 25, 2013 16:04 IST

The Reserve Bank of India (RBI) is expected to keep policy rates unchanged at a six-weekly rate review on Tuesday, ending a year-long cutting cycle as it focuses instead on underpinning the plunging currency.

Economists say that for now the RBI will not raise rates to support the currency, which fell to a record low this month. Its emerging market peers Turkey, Brazil and Indonesia, have raised rates to counter capital outflows driven by prospects for tighter monetary policy in the United States.

"A rate cut is a forgotten issue now," said Indranil Pan, chief economist at Kotak Mahindra Bank. "Until they reverse the recent actions, there is no question of rate cuts."

Since the rupee hit a record low of 61.21 per dollar on July 8, the RBI has announced various measures to support the currency, including raising the cost of short-term funding and restricting banks' use of daily cash. The rupee has recovered over 1 percent since but still faces pressure from a record current account deficit.

So far in 2013, the RBI has cut the main policy rate, the overnight repo rate, three times to 7.25 percent to support an economy struggling with its weakest growth in a decade.

The RBI is unlikely to signal further rate cuts because that could undermine the rupee further. Indeed, it might present a hawkish tone to further bolster the currency's prospects. However, a rise in bank reserves is seen as unlikely since its cash tightening measures ramped up the overnight call rate to more than 10 percent.

"Yes, exchange rate stability is the focus now and that will hurt growth in the short-term," said a central bank official, who declined to be identified because he is not authorised to speak to the media.

"These are temporary measures to stabilise the rupee. These are done to condition expectations on the exchange rate and not to signal a repo rate hike," said the official. The Reuters poll showed the RBI is expected to keep rates on hold until the December quarter to give it time to support the rupee.

Asia's third-largest economy grew just 5 percent in the year to March 31, a decade low. Analysts have cut their forecasts for the current year in the wake of the RBI tightening measures.

Macquarie cut to 5.3 percent from 6.2 percent, JPMorgan to 5.1 percent from 5.5 percent and Nomura to 5 percent from 5.6 percent.

"So far, the recovery was premised on expectations of softer rates," said Gaurav Kapur, senior economist at Royal Bank of Scotland. "But since they avoided raising rates explicitly, I think the RBI may not raise rates in a hurry."